Daily Archives: November 11, 2010

Rumour has it that certain European investors are no longer willing to provide Irish banks with overnight funding. If true, this could trigger the much-discussed bail-out (for it’s unlikely to end in default). A bail-out might still impose losses on bondholders, though, after recent discussions at the EU.

Until now, Ireland didn’t need any extra funding till mid-2011. Shenanigans in the secondary (resale) bond market were troubling, then, but did not need to affect the country’s cost of debt. Just as long as debt auctions took place once things had calmed down. 

Belgrade now has the highest benchmark rate in Europe. Serbia’s central bank has raised the key policy rate a whole percentage point to 10.5 per cent, its fourth raise in as many months.

The sharp increase is an attempt to control inflation, which is being pushed up by rising import prices for food. Consumer price inflation was 7.7 per cent in September and the central bank says it was probably above 9 per cent in October, outside the bank’s current target range of 6.5±2 per cent. 

Former Fed chair Alan Greenspan has an article in today’s FT. It’s quite blunt about China and the US. “Both may be right about each other,” he says. “America is pursuing a policy of currency weakening,” while China’s reserve accumulation has caused exchange rate suppression for “competitive export advantage”. China and the US aren’t just hurting each other: the joint effect of their policies is to strengthen other currencies, placing those countries at a disadvantage.

Unlike most pundits hand-wringing over the current state of play, Mr Greenspan proposes a solution. It is quite radical. The G20, he says, can propose a new rule through the IMF that “limits the accumulation of reserve assets and sterilisation of capital flows”. “It would be easier to maintain and control than a stability and growth pact,” he says, referring to the “failed” eurozone agreement.

Well, yes, it would be easier. But the fact he has considered a stability and growth pact for sovereign states with separate currencies is staggering. The monetary proposal is also radical. 

Ralph Atkins

The European Central Bank’s monthly bulletin, just released, has a retro feel about it. I’ve flipped through its 99 pages (saving the statistical annexe for later) but failed to find any reference to the crisis hitting the eurozone’s periphery, apart from a few factual points on bond spreads.

There were certainly plenty of questions it could have addressed. For instance, what exactly is the current aim of its government bond purchase programme? Launched in May, at the height of the eurozone crisis, the programme had an initial “shock and awe” function, along with the political actions taken then.

Now it seems neither one thing nor the other – it is not a large-scale asset purchase scheme like QEII, nor has the programme been formally ended (as Axel Weber, Bundesbank president, would prefer). Officially, the programme is about restoring the functioning of markets, but what does that mean right now? 

Details are out for the Fed’s bond purchase plan for the rest of the year. $105bn, split into $75bn as part of the $600bn stimulus, and $30bn of ongoing reinvestment of principal payments.

The bond purchase plan is spread across 2012-2040 maturities, though it is front loaded with far more bonds to be bought with 2013-2020 maturities (as the chart shows). Almost all of the purchases will be purchases of regular Treasuries, with just (just!) $2-4bn of TIPS on the menu.

Full details in table below the jump: